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Austerity measures are to continue until the 2020s after George Osborne drops a plan to clear the deficit by end of decade.

The Chancellor said the Government will not have cleaned up the nation’s finances by the end of the parliament after warning that Britain will no longer achieve a budget surplus by 2020.

The Chancellor said the British economy was bracing itself for a “significant negative shock” following the Brexit vote and the Government had to be “realistic” about clearing the budget deficit by the end of the decade.

The decision means that austerity and more spending cuts and tax rises – forced on the Government by the UK leaving the European Union - will now have to be made in the 2020s.

Mr Osborne had pledged to deliver in line with Office For Budget Responsibility (OBR) forecasts, which predicted the UK to have a budget surplus of £10.4 billion in 2019/20 and £11 billion the year after.

But speaking at the Greater Manchester Chamber of Commerce, he said: “Now, as the governor of the Bank of England said yesterday, the referendum result is as expected likely to lead to a significant negative shock for the British economy.

“How we respond will determine the impact on people's jobs and on economic growth. The Bank of England can support demand.

“The Government must provide fiscal credibility, so we will continue to be tough on the deficit but we must be realistic about achieving a surplus by the end of this decade.

George OsborneCredit:
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“This is precisely the flexibility that our rules provide for. And we need to reduce uncertainty by moving as quickly as possible to a new relationship with Europe and being super competitive, open for business and free trading. That's the plan and we must set to it.”

Treasury sources said Mr Osborne had not "abandoned" the budget surplus but instead had insisted the Government had to be "realistic about timing".

According to official figures, the Government borrowed £74.9 billion for the complete financial year ending in March 2016, meaning it overshot its annual target of £72.2 billion by £2.7 billion.

The OBR was predicting borrowing to shrink to £55.5 billion in 2016/17, £38.8 billion in 2017/18 and £21.4 billion in 2018/19.

Paul Johnson, director of the Institute for Fiscal Studies, said the Chancellor’s announcement meant more austerity spending cuts and tax rises in the next parliament.

“You can't borrow forever. So we will have a few more years of more borrowing but my guess is that this is not the end of austerity.

“This means that austerity will go on longer because we will probably have the spending cuts and tax rises right through the 2020s to pay for this.

“You are going to have to have the pain later on to repay the additional borrowing that we are going to need to do in the short run.”

Home Secretary Theresa May, who is the favourite to replace David Cameron as party leader, has said she is ready to ditch Mr Osborne's target of achieving a budget surplus by the end of the Parliament if it was necessary to avoid tax rises.

Michael GoveCredit:
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Michael Gove, another leadership candidate, said it was “sensible to think about what it is that we need to do in the light, perhaps, of OBR forecasts which are due to come, in order to make sure that we bring the deficit down but do so in an orderly way in response to events.

“Let's wait and see what the OBR says, but I think the Chancellor is absolutely right to insist on flexibility.”

Labour welcomed the decision. Shadow chancellor John McDonnell said: “It is only a shame he was not realistic sooner, as under Jeremy Corbyn, Labour has been unequivocal in its opposition to failed Tory austerity.”